new2 building a business model

On Building a better business model

Ziya G. Boyacigiller

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

(Based on Getting to Plan B, John Mullins, Randy Komisar)

For Johnny’s business figure out:

1. How much money does Johnny need from an investor to start his business so he can earn enough money to buy a bicycle? Goal:

2. How much time will it take Johnny to buy his bicycle? Goal:

3. How much time would you estimate it will take YOU to plan Johnny’s business effectively?

Use evidence to build confidence & credibility.

Hope is not

a strategy !

Business Model Element

Analogs and numbers they provide you

Antilogs and numbers they provide you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

GM Model

Operating Model

Working Capital Model

Investment Model

Ref: Getting to Plan B, J. Mullins / R. Komisar

The uncertainty that surrounds most innovations and most new ventures can be significantly

mitigated by comparing the plan on the table to other businesses already in existence.

Discovering or developing a business model that will work…

BUSINESS MODEL means the pattern of economic activity (cash flowing in and out of your business for various purposes and the timing thereof) that dictates whether or not you run out of cash and whether or not you deliver attractive PROFITS to your investors and yourself.

ANALOGS to your idea are successful predecessor companies that are worth

mimicking in some way.

There are many analogs out there, portions of which can be borrowed or adapted to help you understand the economics and various other facets of your proposed business and its business model.

ANTILOGS are predecessor companies compared to which you explicitly choose

to do things differently, perhaps because some of what they did has been unsuccessful.

It is not what you know that will likely make you fail, it is “what you don’t know you don’t know”…

Identify the questions where analogs and antilogs don’t provide the answers.

The questions you cannot answer from historical

precedent lead you to your leaps of faith – beliefs you hold about the answers to your questions despite having no real evidence that these beliefs are actually true.

Ref: Getting to Plan B, J. Mullins / R. Komisar

http://files.posterous.com/jaysteeleRoger L. Martin

Figuring out what customers will buy is a process – not a guess.

Running out of cash isn’t a cause – it’s a symptom. It’s a symptom or signal that the company’s business model didn’t

work.

Business Model is the pattern of

economic activity – cash flowing into and

out of your business for various purposes

and the timing thereof – that dictates

whether or not you run out of cash and

whether or not you deliver attractive

returns to your investors.

To address your leaps of

faith, you’ll have to

leap… that is,

experiment.

A dashboard is a tool that drives an evidence-based process to plan, guide, and track the results of what you learn from your hypothesis testing.

Leap of Faith Question

Hypothesis Metrics/Test

Findings/Results

Insight Gained/Response

1. Commuters will stop and buy a refreshing drink made with fresh lemons.

1. At least 10 customers per day will buy

2. At least 20 people will stop and ask for price.

Customers/day

Set up on a chair with lemons/sugar borrowed from Mom…

1. Mon/2, Tue/0 (rained), Wed/8

2. Mon/8, Tue/0, Wed/24

High pricing deters sales, people look but don’t buy; no point setting up if it rains; seems like demand is less than Johnny thought.

2. People will pay a premium price over Coke selling at $1/glass.

$1.50 per drink will be acceptable

Total customers/ people asking for price

Mon/25%, Tue/-, Wed/33%

$1.50 looks too high.

We need a Plan B.

You are here.

TEST – EXPERIMENT … Use your creativity and find a way to prove or disprove your hypothesis before you waste too much of your time or your money.

Quantify if it is important for you to understand and control it --

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

1. Sales Revenue

2. Investors

If the customers don’t BUY and PAY you for what you sell them, you can’t force them to...

1. Who will buy? (who is your customer?)

2. What will customers buy?(product/service)

3. What pain are you resolving for customers, or what delight are you offering? (value proposition important & not-available)

4. How soon, how often will customers buy?(timing model)

5. How much, how many will customers buy? (unit sales model)

6. At what price will customers buy, and on what basis will they pay? (price model)

7. With what effort and cost on your part? (cost of sales)

Business Model Element

Analogs and the numbers they give you

Antilogs and numbers they give you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

$1 / glass $0.75-10gls/d

?

GM Model

Operating Model

Working Capital Model

Investment Model

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

Gross Margin (GM) =

Revenue – Cost of Goods Sold (COGS)

GM % = 100 X { (Revenue – COGS ) / Revenue }

Sometimes referred to as Gross Profit…

COGS includes all expenses directly related to producing or delivering whatever it is that you sell -- what your customers actually buy .

GM ranges from 0% to ~100%

Question: What is a good GM% ? What is exceptional GM%?

How much money does it take for you to build the value for your customers?

1. “spread” between Price and COGS

2. Managing your product “mix”

3. Your “strategy” (Example: build market-share or profit)

Business Model Element

Analogs and the numbers they give you

Antilogs and numbers they give you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

GM Model

Operating Model

Working Capital Model

Investment Model

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

Operating Expenses (OPEX) are all the day-to-day cost of doing business (running your business), not included in the costs of goods sold (COGS).

Some costs can be included in either COGS or OPEX, and where you include them is a choice you make when you define your accounting system.

OPEX are also called “below the line expenses”.

Operating expenses are summarized in “chart of accounts” – key expense categories defined for an industry. Every industry has one…

Example: Restaurant Industry?

First, start by getting a copy of the “chart of accounts” for your industry (and/or your analog/antilog competitors).

1. What level of cost will you incur in each cost category?

2. Which of these costs can be reduced or eliminated?

3. Which of these costs need to be increased or new cost categories created, to execute your planned strategy?

Business Model Element

Analogs and the numbers they give you

Antilogs and numbers they give you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

GM Model

Operating Model

Working Capital Model

Investment Model

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

Where is your cash?

Staying in business over the long term –

whether getting past infancy in a new

venture, or steering an established

company through times of economic crisis –

means not running out of cash. Where is

“cash balance” found? It is on your balance

sheet.

Working capital is the cash a company needs to have on hand in the short term to keep the business running – pay its employees, suppliers, etc.

Hard truth is when you run out of cash, the game is over – you are out of business ! (Startups call this the “runway” using airport/airplane metaphor, and keep an eye on “burn-rate” and “months to financing”)

Timing of cash coming in and going out, “cash flow", is important so you don’t run out of cash.

1. Current Assets (measured in days)

money soon to be available to company such as cash, short-term bank deposits, accounts receivable (money customers owe), and inventories (measured in days) you paid for and can sell.

2. Current Liabilities (measured in days)

money soon to be paid by the companysuch as accounts payable (money you owe suppliers), short term debt.

3. Working Capital =

Current Assets (+/-Inventories ) – Current Liabilities

QUESTION: Can you achieve Negative Working Capital position?

NOTE: Non-cash elements only should be used for this analysis.

• Current Assets = 37 days• Inventory: 4 days• Accounts Receivable: 33 days

(subscribers pay in advance, but advertisers pay arrear, this figure reflects the later)

• Current Liabilities = 109 days• Accounts Payable: 70 days• Unearned Subscriptions: 39 days

(subscriptions paid for but not yet delivered)

• Net of these = --72 days

• That’s is 72 days of net free cash, (72/365 days = )20% of 1992’s $1.8 billion in revenue, that Dow Jones could use for other things. It is like having $360 million of free money…

Capital always comes at a price: From investors or from banks…

Investors and you should care about Return on Investment…because you can do other investments with your money (“opportunity cost”).

Return on Investment (ROI) =

Net Cash Flow (NCF) / Invested Capital

1. Consistent with your revenue model, how soon can you have customers pay you?

2. How soon do you need to pay supplier and employees?

3. How much inventory do you need to hold to run your business effectively?

Business Model Element

Analogs and the numbers they give you

Antilogs and numbers they give you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

GM Model

Operating Model

Working Capital Model

Investment Model

1. Revenue

2. Gross Margin

3. Operating Expenses

4. Working Capital

5. Investment

Investment means the money you need to start your company…

1. Less investment means giving less of the company to investors.

2. Less investment means less credibility lost when you, almost inevitably, declare your Plan A is not working, and you are switching to Plan B.

3. Less investment means fewer sleepless nights for you, your employees, supplier, and investors.

How is it possible to need less investment?

1. How much cash you’ll need to get into business, (including a modest cushion of spare cash to make one or more transitions from Plan A to Plan B Plan N…)

2. How much cash you need to take your company to break-even cash flow (so that you don’t need to invest any more, except perhaps, to grow the business, which by then, has already been proven viable).

1. Prelaunch Phase: What are the hard assets you need, and what will they cost

to buy, rent, or lease? What are the development activities to complete, and

what will they cost? What are the leaps-of-faith you must test, and what will it

cost? Which of the above can you delay, find a way to do

without, do more cheaply or simply?

2. Postlaunch Phase (until breakeven): What revenue and gross margin can you generate to

compensate for your ongoing costs? How lean an operating model can you run? Which key leaps of faith, if proven, will signal stepwise

reductions in risk? How much cash will it take to reach each of them, and how much of your funding can be postponed until later?

Business Model Element

Analogs and the numbers they give you

Antilogs and numbers they give you

Leap of Faith (bets) around which you will build your dashboard

Hypothesis that will prove or refute your leaps of faith

Revenue Model

GM Model

Operating Model

Working Capital Model

Investment Model

For Johnny’s business figure out:

1. How much money does Johnny need from an investor to start his business so he can earn enough money to buy a bicycle? Goal:

2. How much time will it take Johnny to buy his bicycle? Goal:

3. How much time would you estimate it will take YOU to plan Johnny’s business effectively?